There are no easy answers in this market. Companies and investors alike have to hunker down and make tough calls, but that doesn’t mean companies and investors can’t make money, even in the short term, says Kerry Smith, a research analyst with Haywood Securities. Smith and Haywood’s staff geologists narrow their sights on small companies cheaply exploring for beaten-up commodities. In this interview with The Gold Report,Smith reveals some fresh names, as well as perennial favorites on Haywood’s quarterly round-up.

The Gold Report: Kerry, Haywood Securities recently published its Q3/13 Junior Exploration Report, which tells prospective investors about 17 exploration companies across a range of mine commodities. There were 20 companies covered in the Q2/13 report. Six of those have since been removed, while three new companies were added. Why does the report have such a short-term investment horizon?

Kerry Smith: Our focus is to identify companies that will have meaningful news in the next three months that could impact the share price. We’re looking for companies with projects that we like from an exploration perspective and we have a Ph.D. geologist who is charged with making sure the names in the report offer geologic potential.

TGR: Investors typically take a longer-term view of mining equities, but do you believe you can make money with a short-term horizon?

KS: If a company has meaningful catalysts coming in the next three months, money can be made by investing in it. I would agree that, ultimately, the way investors make real money in the space is by investing in an exploration play that makes a discovery and staying invested until it has been drilled off to a resource stage. Typically, investors would want to sell before the company starts talking about permitting, construction and project finance because that’s when a company goes into a huge vacuum there is no news and the stock rolls over.

We’re trying to find companies that can deliver decent catalysts in the short term. It’s a constantly evolving list. We roll names off, and we roll names on.

TGR: There are hundreds of exploration plays. At a time when investors are eschewing risk, what do those three new companies in the report have in common?

KS: We like the projects that they are working on. There is the potential for a discovery or they already have a discovery with the potential to grow. The corollary is that the valuations are relatively modest.

Our primary criterion is the potential to deliver an economic discovery with compelling margin potential and high project returns. A company like NovaCopper Inc. (NCQ:TSX.V; NCQ:NYSE.MKT) controls a world-class, volcanogenic massive sulfide, base metals belt in Alaska. It will continue to deliver meaningful news. CEO Rick Van Nieuwenhuyse is an exploration geologist. He’s very good at dealing with First Nations issues and exploring for and finding deposits. This is an exploration story, and that’s what he is good at.

NovaCopper could stay on our list for some time because it’s in an established district with established discoveries. That is the kind of deposit that can make it in this market.

TGR: Did any new investment themes come to light while assembling the report?

KS: The market is looking for projects with high grades, low political risk and lower capital expenses (capex). It’s impossible to finance a 1 billion ton ore deposit with $24 billion ($24B) in capex. The market is looking for bite-size projects, like a heap-leach project with a $100 million ($100M) capex.

Investors are also interested in open-pit milling operations where the mill is a straightforward, cyanide-leach circuit. It’s not complicated metallurgy and companies can get good recoveries.

It all comes down to margin. You can have a good-grade, open-pit deposit, but if the strip ratio is 20:1, it’s not going to be very interesting economically.

In my opinion no junior company should be focused on a project that delivers less than a 30% return after tax at a gold price of about $1,200/ounce ($1,200/oz). A project that needs $1,300/oz gold to get a 15% or 20% return is destined to fail in the near term.

There are way too many projects that are being pursued and promoted that aren’t high-return projects.

TGR: The commodity price charts in your report look fairly stable, perhaps with the exception of uranium. Which commodities are you most bullish on?

KS: We are the most bullish on the commodities that are most out of favor: zinc, uranium, iron ore and gold. The longer these metals stay out of favor and the less new supply comes into the market, the better the fundamentals will be going forward.

TGR: Most of the companies in the report are working on projects in North America, which is a safe jurisdiction. What are some of those companies?

TGR: Balmoral should be putting out a resource estimate on its Martiniere project and the Bug Lake Trend this quarter. What’s the early line on this?

KS: At this stage, with the limited drilling it has done, Balmoral won’t get more than 11.5 million ounces (11.5 Moz) at Bug Lake. That structure is pretty complicated. It will take a lot of drilling to figure out those structures and chase these high-grade zones. But it has high grade and the potential to grow over time.

TGR: The company talked about its relationship with GTA Resources and Mining Inc. (GTA:TSX.V) in a press release. What do you know about that?

KS: Balmoral joint-ventured its Northshore project with GTA. Darin Wagner, who runs Balmoral, is a good geologist. In the current market, he probably had more projects than he could raise money to drill on. Northshore was lower priority. GTA is running the program now.

TGR: Balmoral raised $6M in a flow-through financing recently. It has about $15M now.

KS: Its 2014 burn rate is going to be in the $68M range. The way a flow-through works is that the company has to spend it in the next taxable year. The amount of money raised is roughly tied to planned spending next year.

TGR: What are your thoughts on the Martiniere project?

KS: Martiniere is looking OK. It’s complicated geologically, though it has a number of discoveries there. It doesn’t have great infrastructure either, so it’s a somewhat expensive area to work in.

In those kinds of situations, I like management teams that have a good track record, know what they’re doing and know how to run these programs efficiently. Darin qualifies in that regard.

It’s tricky in this market because exploration companies are constantly raising money. If a company is going to keep coming back to the market, it needs to show that it is spending those funds wisely. Darin is pretty good at that.

TGR: Probe Mines has said that it is going to put out a resource update on its Borden gold project this quarter. It’s at about 4.3 Moz now. Is that going to grow?

KS: Probe’s focus is on expanding the high-grade core of that deposit, which it is drilling now. The preliminary economic assessment (PEA) probably won’t be available until H1/14. It’s going to be a PEA on an underground operation, not an open pit.

The original plan was to develop a large, low-grade, open-pit milling deposit in Ontario. Those kinds of projects were of interest to the market two years ago when gold was pushing up to $1,923/oz. In this market, those projects have no investor appeal at all because people recognize that the grade is low and the capex and operating costs are going to be very high.

The advantage that CEO David Palmer has with the Borden project is its high-grade core, which is pretty continuous and well defined. It’s going to be an underground operation, which would be significantly smaller than an open pit, so the capex will be lower. The grade Probe is targeting will be in the 56 grams per tonne (56 g/t) range. If it can come up to 1.52 Moz, 56 g/t material that it can mine underground, it would be a lot more interesting.

That’s part of the reason that Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) has come into the story. Agnico is now a strategic shareholder of this company. Agnico’s primary interest is in the belt because this is a new discovery in a part of Ontario that historically hadn’t been well explored for gold. Agnico knows how to mine 56 g/t gold deposits in Ontario underground because it has mined them for the last 40 years. If Probe can’t develop a large, open-pit milling operation at 11.25 g/t, there is an opportunity here for Agnico. There’s optionality that it could also mine a higher-grade underground deposit. That kind of expertise is pretty well established within Agnico-Eagle.

TGR: Probe is conducting an 80,000 meter drill program as we speak, which is probably about two-thirds completed. What is it hoping to achieve?

KS: It’s trying to better define a high-grade core and convert Inferred to Measured and Indicated. The high-grade core starts at a couple of hundred meters below surface in the guts of it, so it would be more amenable to underground. That’s one reason why Probe is looking at this option.

TGR: What sort of cash does Probe have

KS: It has about $36M today, so it is well funded. Its 12-month budget for 2014 is in the range of $1215M. It still has at least two years of cash. There are not too many junior companies that can say that.

TGR: Are there some other companies that you want to talk about in North America?

KS: There are some other stories elsewhere, like Reservoir Minerals Inc. (RMC:TSX.V) in Serbia. It is a 25% partner with Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) on a copper discovery that is extremely high grade. We’re primarily interested in margin, and that generally comes from better grades.

TGR: I don’t think any list would be complete without some companies working in Mexico. Do you want to head there?

KS: Cayden Resources has done pretty well in this market. It is drilling its El Barque

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